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Secrets of Bonding #34: Been There, Done That

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Prior Experience

“Prior Experience” There may be nothing more important when it comes to Bid and Performance Bonds. Let’s talk about why this is the case and how to develop this critical element of a bonding application.

In a real sense, the evaluation of a contractor’s prior experience is at the heart of surety underwriting.  Remember, surety bonds are not insurance, and sureties do not expect to have claims or losses.  A surety intends to provide bonds for proven applicants.

“In the last two years we built three projects of similar size and nature – all profitably completed and to the customer’s satisfaction.”

Surety questionnaires always ask about the large prior jobs so they can be compared to the upcoming bond opportunities.  However, there is more to the process than just comparing the contract amounts.

Size, Nature, Location

Surety underwriters compare the new project size to the largest similar contract previously completed. Conventional wisdom is to not increase more than 100% over prior experience.

The prior job must be a single contract, not a series of assignments for the same owner and … must actually be completed to count. The difficulty of the work must match.  Even if the dollar value was the same, underwriters would not bond a five story building if all the prior experience was on one story structures.

Location can help or hurt.  A job located “in our back yard” offers a special advantage regarding ease of supervision and performance.

On the other hand, there can be unique challenges when contractors roam beyond their normal turf.  Labor unions are different as is weather, ground conditions, labor productivity rates and other factors. Supervision of the work can be more difficult. Logistics for material delivery may be harder.  You also have to ask yourself, on competitively bid work, how can our contractor perform the work more efficiently (cheaper) than the companies located there?

All these factors enter into determining if prior experience qualifies the contractor for the new project.

Helpful Hints

Here are some ideas that may help when contractors are “stretching” for larger projects.

  1. Best Foot Forward – Don’t skimp on the details when describing prior completed jobs.  If the contract had addendums and the amount increased, the final contract amount is used for reference purposes. Include technical details such as major aspects of the work and any special accomplishments (completed ahead of schedule, received an award or other recognition.) Satisfied customers should be solicited for “good guy letters” upon completion.  Such letters can be forwarded to the surety with the application.
  2. Inflation – A large job completed years ago would be worth more in today’s dollars. This analysis can be particularly helpful on larger projects.
  3. Prior experience of individuals – Key people may have strategic experience from their prior employment. Be sure to describe their actual responsibility.
  4. Directly Related Experience – The contractor may have worked for this owner or architect before. They may have performed the “exact same job” but in a lower dollar amount.
  5. Special Skills or Equipment – Staff members may have special training that uniquely qualifies them for the large project.  The company could have behemoth or high-tech equipment that will facilitate the new contract.
  6. Ease of Performance – Is the contract actually a series of assignments to be performed sequentially – no one of which is beyond the contractor’s capabilities?
  7. Buddy up – A mentor, Joint Venture partner, or even a subcontractor can provide additional expertise for the new project.
  8. Analyze the Costs – Higher costs do not automatically mean greater difficulty.  The labor portion of a contract is viewed as a greater risk than materials or equipment. An hour of labor can be performed inefficiently or incorrectly but a brick is a brick. When new projects include expensive materials, it can increase the contract price even though the difficulty may be no greater than prior projects.

Summary

The point is that the underwriting has to make sense.  The management staff of the construction company knows their limitations better than anyone, and they have already decided the new project is a good opportunity with a reasonable risk. When presenting the file, you must explain why this is the case.

Call us with you next Contract, Site or Subdivision Bond.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #27: Beneficiaries of a Bond

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The process starts simply: A construction company needs a bond in order to acquire a new project.  So they contact their agent who surveys the market and seeks a surety that will support the account and provide favorable terms. There are a number of beneficiaries of this transaction:

Bond Agent

The bond agent and agency earn a commission on the transaction.  These revenues not only provide the basis to pay the agency’s sales and administrative staff, they also form a production base that enables the agency to attract more sureties and additional bond clients.  It is a key to their current and future prosperity.

Contractor

Bonds enable contractors to acquire new work – the lifeblood of their business.  The newly issued bond not only provides a profit making opportunity, it also helps build the company’s track record of projects completed under bond.  This is a higher standard of performance than unbonded work because of the additional scrutiny by the surety, paperwork and reporting requirements, and related activity such as accounting and legal requirements.

Having a surety and performing bonded work helps the contractor acquire future work and additional bonds. It is a building process and an important part of the company’s credentials.

Obligee

Some obligees, such as public bodies (city, state and federal contracts), are required to obtain bonds because of their beneficial effect.  They are an effective way to protect the public interests. Other obligees such as owners of commercial property or general contractors may choose to bond their projects. The advantages are numerous.

From the outset, the obligee has a pre-qualified contractor on the project, a better contractor.  Sureties only issue bonds after making a thorough evaluation.  The bond protects the obligee from the contractor’s failure to perform and from non-payment of subs and suppliers – and those potential claimants are equally protected.  Bonds are required on public work because they are such a great means of assuring the correct performance of the project.

Surety

For the surety, issuing the bond means incurring a risk and earning a fee. This is, of course, the surety’s business.  It is the purpose of the company to identify and issue bonds that meet with their underwriting requirements.

Call us with you next Contract, Site or Subdivision Bond.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #23: Myth Busting the T-List

Steve GoliaLeave a comment

Technically the correct name is “Circular 570.”  The federal Treasury Department produces this list, thus the nickname “T” list. Website: “fms.treas.gov/c570/c570.html”

It is re-issued each July first and contains all the corporate sureties reviewed and approved by the Treasury Department.  It also states the largest single bond amount they may provide on a federal contract. Let’s look at some common assumptions about the T-list.

Myth: The IRS tried to withhold tax exempt status from the Tea-List.

Finding: False! (Just wanted to see if you’re paying attention.)

 

Myth: The government somehow “backs” the sureties on the T-List.

Finding: False! The companies on the list are merely pre-approved for the convenience of the government when administering contracts. The purpose is not to benefit anyone outside the government.

 

Myth: T-listed sureties are the best in the industry.

Finding: False! Acceptance on the T-List indicates that

1. The surety chose to apply for approval, and…

2. They obtained it.

Being T-listed does not indicate the relative strength of one surety compared to another.  For example, there are excellent surety companies that have never sought T-List approval – so they’re not on Circular 570.

 

Myth: It is illegal and / or impossible to waive a T-listed requirement if it is stated in a project specification.

Finding: False! Private obligees, such as a General Contractor offering a subcontract, have complete discretion and can modify the requirements if they so choose.  It is common to reserve the right to waive any technicalities if the obligee feels it is in their best interests.

 

Myth: When projects include federal funding (such as a local housing contract), federal bonding requirements automatically apply.

Finding: False! The party offering the contract may set their own requirements.  They could chose to follow some portion of the federal requirements or simply use their own. Federal requirements (as stated in the Federal Acquisition Regulations) only apply to direct federal contracts such as the Army Corps of Engineers, etc.

 

Myth: When it comes to corporate surety bonds, only the federal government is obligated to use Circular 570 sureties.

Finding: False! If other jurisdictions choose to adopt such a requirement, it would then be mandatory.

Conclusion: The T-list is a convenient tool for federal contracting officers when administering government projects.  It is also helpful for outsiders when evaluating a corporate surety bond.  Circular 570 is easy to access online and it provides a list of sureties accepted by the federal government.

However… NOT being on the list does not necessarily mean anything negative.  Not all sureties find it beneficial to seek approval on the list, so they just don’t do it.  They could still be great companies with strong bonds worth taking.  In fact, they could be the best surety in the country, and still not be on the list.  

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding #17: Dual Obligees & Additional Insureds

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Contractors are often required to name an architect, building owner or lender as an additional insured on their insurance.  The insurer will do so, and assume the additional risk for a minimal or no charge.  While there are some potential consequences for the contractor, most favor this extension of coverage without hesitation.  Why shouldn’t they? After all, the point of the insurance is to transfer risk away from the insured.

With a Performance Bond, there is a similar situation with the Dual Obligee rider.  This rider modifies the bond to include a party that was not named on the contract.  An example of such a party is a lender to a borrower who owns property. The borrower has hired a contractor to work on the property.  The Performance Bond that guarantees the contract has the property owner as the natural Obligee (the “owner” on the contract).  The lender has an interest in the project and may therefore ask to be named as a Dual Obligee.  Sureties will normally do this (and for no additional charge), but it is not without consequences for the contractor.

The Dual Obligee rider enables the lender to make a performance bond claim directly against the Surety – and thus creates additional risk for a potential loss on the bond. So why should the contractor care?  (See Secret #1)  Bonds are not insurance.

A surety relationship is more like banking than insurance.  Like a lender not expecting a loan to result in a loss, a surety does not expect any bond claims or losses.  Similar to a bank’s promissory note, a surety requires a General Indemnity Agreement (GIA) which is a hold harmless intended to prevent any financial loss to the surety if a claim occurs.  Read this as “no risk transfer.”

So let’s go back to the Dual Obligee rider.  All contractors are required to provide a GIA for their surety.  So if the bond is extended to include the lender, and the risk for a bond claim or loss in increased, who assumes this risk?  The answer, of course, is the surety plus the contractor.  The nature of a Performance Bond is that the contractor, the “Principal,” always shares in the bond risk – both in their company and personally.

Summary: Adding additional insureds may seem like a freebie, but contractors should be cautious when adding Dual Obligees to a bond.  Each obligee is another master they must please on their contract.  Each one is a risk and a financial threat.  Some entities must be added when requested such as a lender, the city or other entitled parties.  Other times there is a feeding frenzy: “Let’s add everybody.” 

If the surety fails to object or at least ask for justification as to why such parties must be added, the contractor should… because unlike insurance, on a bond the contractor assumes risk.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)